What Is Reduced Paid-Up Insurance?

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Updated: 18 May 2024
Written by
Jeff Bray
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It would be difficult should you or a family member face hardship and need emergency funds to get through the ordeal. Did you know that your life insurance policy could possibly serve as your source of funds?

While it is known that 38 percent of households would struggle within a month financially should the policy owner pass, what about struggling while the policyholder is still living? Is there a way to access funds now?

In my nine years of experience, I have seen this often. Many families face hardship, and they need immediate funds. Through this article, I plan to show you how you can access your whole life insurance policy’s cash value and use it now to relieve some of the pressure of a difficult financial situation.

Key Takeaways

  • Reduced Paid-up insurance is a benefit of a Whole Life Insurance policy where one can stop making payments on their insurance policy, but still keep a death benefit

  • Policyholders who chose a Reduced Paid-up option either no longer want to make payments or can no longer make them due to financial reasons

  • An alternative to a Reduced Paid-up policy is a paid-up option, however, a policy must meet certain cash value stipulations

What Is Reduced Paid-Up Insurance?

Reduced Paid-up insurance is life insurance one elects to purchase from converting their existing Whole Life Insurance policy. The insured accepts a lesser face value in lieu of no longer having to make premium payments.

There are times when an insured hits a rough patch and they need extra funds. Rather than taking out a high-interest loan or putting themselves in debt to another, Reduced Paid-up insurance can be an option to assist with bills, medical expenses, or other emergency expenses.

At the same time, you are able to maintain a certain level of life insurance, although it will be less than the face value of the original policy you are surrendering.

How Does Reduced Paid-Up Insurance Work?

First, one must have a Whole Life policy. Reduced Paid-up does not work with Term insurance, as Term policies do not build cash value. The Whole Life’s cash value is how one obtains a Reduced Paid-up insurance policy.

Next, you must convert your Whole Life policy. The longer you’ve had the policy, the greater the cash value will be and therefore the higher the amount of Reduced Paid-up insurance you can receive.

There are factors to consider. In most cases, you will not receive the face value of your original policy. If you’ve had the Whole Life policy for a while your newly attained age will factor into how much you qualify for. However, this amount will not change, and it is paid in full—no more premiums to pay.

NOTE: Permanent insurance, which includes Whole Life Insurance, accounts for 60% of all life insurance direct purchases.

Benefits Of Reduced Paid-Up Insurance

As with all forms of insurance, there are benefits and drawbacks. With Reduced Paid-up life insurance these are some of the benefits:

You can stop paying for your policy and still have insurance.

Not having to surrender your life insurance policy is good news to someone looking to use their life insurance policy as an emergency income stream.

In some cases, you can still receive dividends.

Reduced Paid-up life insurance is still a Whole Life policy and builds cash value. Depending on your policy and its face value, you can still receive annual dividend payments.

Insurance for life

Since your policy is paid for, you will always have life insurance at a specific face value.

Drawbacks Of Reduced Paid-Up Insurance

As with all good things, there is a negative side. Some drawbacks of converting your Whole Life policy to a Reduced Paid-up insurance policy are:

Loss of riders

If your original life insurance policy had riders attached to it, you will surrender those along with your policy. This means if you had a Critical Illness or Disability rider on your policy, these become inactive when you convert your policy.


Once converted, you cannot change your mind. This means that if you convert your policy to free up money to pay bills, or you got a promotion and now can afford the old policy, you would not be able to switch back to your former life insurance policy.

Loss of original death benefit

When you convert your policy from Whole Life to Reduced Paid-up, in most cases you will lose your original death benefit. It will be lowered based on the cash value of the policy used to purchase the policy minus rating factors of the insured.

What Is The Difference Between The Reduced Paid-Up Option And A Paid-Up Addition?

You may have heard the term, Paid-up Addition. This is different from a Reduced Paid-up option in that you keep your original Whole Life Insurance policy. With Paid-up Additions you are adding additional death benefit amounts of life insurance to the policy without increasing your premium.

Paid-up Additions are funded through dividends. Instead of being distributed, they are added to the policy’s cash value, increasing the death benefit.

NOTE: There is another form of Paid-up to consider. Paid-up Insurance is when a policy’s cash value can sustain the policy. You then convert it and then you no longer make payments.

What’s The Difference Between Reduced Paid-Up Insurance And Extended-Term Insurance?

Another option, if a Reduced Paid-up’s death benefit is low, is Extended-term insurance. Extended-term insurance will generally match your Whole Life policy’s cash value, then select a term value equivalent to it.  Notice though, with Extended-term insurance you lose your Whole Life status. Here are the pros and cons:

  • PRO: You keep your life insurance at near face value of your original policy.
  • CON: You no longer have the Whole Life component. Once the term is up, you will no longer have life insurance.
  • PRO: You no longer have a monthly life insurance premium to pay.
  • CON: You can’t reverse your decision once it is made. If you want more life insurance, you will need to requalify.

To obtain an Extended-term insurance policy, you would convert your Whole Life policy. The Accumulated Cash Value is used to purchase an equivalent Extended-term policy. The catch is that when the term is up, you will no longer have life insurance.

Here is how switching to an extended-term insurance plan may look:

Original WL policy Accumulated cash value Extended term
100,000 10,000 20 yr. policy @ 100K
250,000 5,000 10 yr. policy @ 250K
150,000 25,000 30 yr. policy @ 150K

These numbers are not exact. Your policy will differ depending on your personal situation.

NOTE: One in three believe death benefits from a Life Insurance policy are taxable. This is not true. However, if you earn interest and are paid on it, you are required to pay taxes.

What Is A Non-Forfeiture Clause?

The first thing to understand about non-forfeiture is that one must normally have their insurance policy for a certain length of time. This is due to building cash value within the life insurance policy. It takes 3-5 years for a life insurance policy to accumulate funds.

That being said, a non-forfeiture clause allows the policyholder to stop making payments on their life insurance policy in lieu of the cash value that is within the policy. They then can take these funds and use them for a few purposes:

  • Purchase Extended-term. As we’ve just discussed, you can convert your policy to a term and keep it for the same face value, but for a set number of years.
  • Purchase Reduced Paid-up. You can also keep your life insurance for life but at a reduced face value.
  • Use accumulated cash value to pay premiums. This is basically not surrendering the policy but taking the cash value in the policy and using it to make current premium payments.
  • Surrender policy for cash. With this option, you are canceling the policy and accepting the cash value that has built up. You will no longer have life insurance.

Who Is Reduced Paid-Up Insurance Best For?

According to a 2023 LIMRA study, 59% of parents own life insurance. Among those, 56% say it is to assist with paying for final expenses and burial costs. It is important to assist loved ones left behind and to leave a legacy if you desire to do so. However, if you are financially stable, then Reduced Paid-up insurance may not be your best option.

Reduced Paid-up insurance can be an option if you find yourself in a financial bind, you need emergency funds, or you want to cut monthly expenses. For instance,

  • you or a family member are going through a financial hardship and need to cut expenses. If you’ve had your life insurance policy for a while, converting your policy would provide you with a sizeable Reduced Paid-up policy and free up future funds from having to make monthly payments.
  • you purchased your policy to protect multiple investments such as your home and vehicles. Today, these items don’t need as much insurance. By not needing to protect as many investments, you can reduce your out-of-pocket expenses by converting your policy to a Reduced Paid-up policy.

Who Is Reduced Paid-Up Insurance Not Best For?

When one has their whole life insurance policy long enough, it can eventually become self-sustaining. In this situation instead of converting to a Reduced Paid-up insurance policy, you can allow the cash value in the policy to make your premium payments on your current policy. Of course, the performance of the market will determine the final payout upon death.

Other situations where Reduced Paid-up is not a benefit are:

  • If your policy is newer. For those who have only had their policy for a few years. This is primarily because the option is not available as there is no cash value, or it is not worth the surrender value.
  • If your policy had riders. If you purchased life insurance with specific riders, once you convert your policy, you lose those riders. If you rely on that benefit, then you may want to reconsider your conversion.
  • If you have significant debt. Life insurance is ideal to assist loved ones left behind to cover medical expenses and other bills. Reducing your life insurance could leave them in a bind with a lower death benefit.

NOTE: The 2023 Insurance Barometer Study showed that 39 percent of consumers intend to purchase within the next year. Gen Z percentage is at 44 and Millennials’ interest is at 50%.


What is an example of a Reduced Paid-up policy?

John has had a whole life insurance policy for fifteen years. He’s hit a rough patch and needs funds for home repairs. He converts his policy in which he has built up 350K cash value to a Reduced Paid-up policy of 200K. He continues to have life insurance and has funds for his home repairs.

What does paid-up mean?

Paid-up is when the insurance policy is paid in full. The policyholder is no longer required to pay a monthly premium to have a death benefit.

What is the paid-up amount in insurance?

The paid-up amount will be the new face value of the policy. It is determined at the time the policy is created and factored by the cash value and current attained age.


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